Following volatile and versatile weeks of Awakening (to the Fiscal Cliff), followed by direction-less trading (in – temporary - absence of Fiscal Cliff discussions) and then a huge rebound (All is good!), the last week of November had been Cuddle Time. Nice and easy. A big Hug for everyone: Bonds, Equities, Periphery, ah, Periphery bonds! Greece… Didn’t Super Mario himself say, albeit in a different context: “We were living in a Fairy World”. Fairies, rainbows, wonderful world… We had to put IZ on the case, for a BIG cuddle!

Europe ended that week direction-less on its own on Friday30 Nov with Risk still rather firmer than not, but with equally ok bonds. Macro data remained bleak, although expectations have been put so low lately that anything about palatable would do. Not much in terms of FCDRE. The week ended drifting, chatting or checking. "What's Up?" (Bunds 1,38% +1; Spain 5,3% -2; Stoxx 2580 unch; EUR 1,301 +30).

Peace & Love.

As we ended November, we started December. Quietly. Monday03 Dec had some Fiscal Cliff Discussion Risk Event, some Spanish budget math. Questions on others. Bah… Things felt a bit out of touch with reality here (equities vs. bonds). And that Greek buy-back prices looked really, really generous. Outwordly. Then again, best way to get rid of private ownership. After the OMT, the OPM… Obviously, other people’s money. Manufacturing PMI painted a slightly less bleak picture, but on rock bottom levels. "Out Of Touch" (Bunds 1,41% +3; Spain 5,24% -6; Stoxx 2580 unch; EUR 1,306 +50). Same treatment for Tuesday: Lather. Rinse. Repeat. Europe still doing about fine on its own and with an urge to test higher risk levels, in absence of negative news. US remained more fickle on FCDRE. If it wasn’t for a bit of FCDRE… Tick. By. Tick. Movements. Equities high. Soft Core closing on historic lows. "11 O’Clock Tick Tock " (Bunds 1,39% -2; Spain 5,23% -1; Stoxx 2587 +0,3%; EUR 1,308 +20). And a further sleepy sequel on Wednesday: Lather. Rinse. Repeat. Over and over. Europe still doing rather fine on its own and with an urge to test higher risk levels, in absence of negative news. However, Spanish BONOs ended feeling sad… after a botched auction. EGBs basked on a bit of uncertainty, a repeat of reaaally low, but better Service PMI numbers and that Spanish weakness with the Soft Core compressing further. The US remained more nervous and Apple got trashed. Question of Muppets getting nervous out of boredom, or what? "Furry Happy Monsters" (Bunds 1,35% -4; Spain 5,38% +15; Stoxx 2589 +0,1%; EUR 1,307 -10) . Of course, Thursday had once more a strong start in Risk to take out new 2012 highs in Equities and trying to retrade 2012 Credit lows, too. Core EGBs remained cool, but eventually Bunga Square’s rug pulling on Monti scuttled all that easy living by noon, weighting heavily on the Periphery and boosting Core EGBs. Super-Mario was gloomy at his show. The equity–bond divergence was not yet a flyer, though… The US went sideways and Risk Watchers back to scanning European politics. The EUR fell heavily off the carpet. "Magic Carpet Ride" (Bunds 1,29% -6; Spain 5,46% +8; Stoxx 2605 +0,6%; EUR 1,297-100) . We closed Friday musing about the need to find other ways to kill time until Year End. Morning highs, lunch time lows and then trailing the US. EGBs remained on the stronger side with augurs seeing a weakening Germany and calls for lower rates putting the EUR under pressure. Ok, Germans: Now work! Somebody has to pay the bills! "Bruttosozialprodukt" (Bunds 1,3% +1; Spain 5,45% -1; Stoxx 2597 -0,3%; EUR 1,295 -20). NFP were strong, hitting USTs, but not enough to persuade US equities to do more than trade sideways.

Eventually, this was a very quiet week, after all. If it hadn’t been for the EUR volatility, a rather botched Spanish auction, Apple getting peeled and Bunga Bunga politics, we would probably have trailed mostly sideways, trying to sleepwalk into the year-end. And still, if you want to sleep tight, you seem in need to remain long Risk AND long bonds.

Slapped by 12 bp the week France got downgraded (caught together, hung together) and when Risk went soaring, Bunds had already recouped 6 bp last week and added a further 8 this week. Summer 2012 levels, when the living was easy. Or simply back to mid-November… By and large, range-bound and now rather at the lower end (1.13% - 2.07%, retracements at 1.35%, 1.49% and 1.60% on the upside).

Monday +3 on Risk On to close at the week’s high of 1.41%, tightening by 2 on Tuesday, 4 on Wednesday after the Spanish auction, snapping 6 tighter on Bunga Thursday to close at 1.29% before closing the week at 1.30%.

Note that Schätze moved back strongly into negative territory (-9 to end at -0.080%) with 5 YRS OBLs outperforming the wings (-11 to 0.29%).

NB: End of July closing lows in sight for 2 YRS -0.095%, 5 YRS 0.24% and 10 YRS a little further away at 1.17%.

Soft Core still doing ok, though, but caught between the bullets. Still, France, too, was allowed to have an auction right on historic lows on Thursday and managed to sneak below 2% in 10 YRS. Belgium is piggy-backing, but already expensive enough compared to France, can’t push much more on its own. Austria overtaken by both, having had a solo escape from its Soft Core brethren earlier. Historic lows hit on Friday close in the Soft Core and Agency bonds. Hard Core lows were in June.

Things were certainly less straight-line for Periphery bonds than during the previous week, where Italy had tightened 26bp and Spain 30bp. While Monday saw a brush with 2-year yield lows with 10 YRS hitting respectively 4.37% and 5.15%, it was difficult to maintain that drive and while Tuesday was still about ok, although off these lows, Wednesday’s rather unimpressive Spanish auction (less than target-size and pretty poor prices) sent BONOs spinning 15bp wider. Bunga Bunga’s rug pulling exercise on Thursday sent Italy and Spain spinning big time over lunch, some 15 bp higher, before recovering somewhat. Still, damage done: Italy wider by 4 on the week (-5, -2, +3, +13 & eventually -5, after widening in the morning) and closing 323 to Bunds (+12) and Spain wider by a quarter for a while, closing +15 (-6, -1, +15, +8 & -2), ending at 415 to Bunds (from 392).

Italian 2s softer by 4 on the week (1.84% after 1.80%) and Spain +10 at 2.93% (from 2.83%), both closing 10 better than Friday morning wides. 2-10s flattening for a while in Italy, before closing unchanged at 26 and steepening somewhat in Spain (252 after 247).

The Greek bond-buy back prices were finally disclosed on Monday. And what prices they were! The bonds went through the roof to hit the buy-back / exchange levels. Obviously other people’s money… These bonds closed – on a price basis – about 34.3% and 25.7% on Friday 23 Nov and about 35.60% and 28.50% on Friday 30 Nov. Rather the bid side (then), so put the offer maybe 1 point higher, but these prices really seem generous. And somehow 5% above the levels only 10 days earlier. No small change…. Obviously, other people’s money… After the OMT, the OPM… Some corrections thereafter. -0.25% on Tue (price-wise), split Wednesday (-0.75% / +0.25%). Ending the week with 2023s at 40.75 (14.15%) and 2042s at 31.0 (11.71%), which is a nice end of the year give-away to some astute buyers.

Buy-back price proposal: 38.1-40.1% & 30.2-32.2%

Another historic weekly low in Swaps (up to 11 YRS). 2-10s unchanged at 126, with 2-5s at 44 from 45 and 5-10s adding 1 to 82. 10-30 YRS still steepening, which strikes me as odd, again, ending at 70 (from 63). As last week (+2 to 63), I would expect X-longs to tighten in increased an increased low-inflation cum Risk On scenario.

Highs were respectively 208 &184 in Nov 2011 and then May 2012 in the Main, 355 & 309 for Financials and 842 & 753 for the Crossover. So we’ve come some way here, too.

European Risk was definitively on a ramp, following the prior week’s 1.1% equity rise in cuddly surrounding, but totally held back by US FCDRE (and some, but not much, Periphery jitters). Repeated attempt to open higher and take out new 2012 highs have repeatedly been scuttled by less supportive US markets and the week see-sawed higher, tick by tick, with Monday unchanged, Tuesday up 0.3%, Wednesday 0.1% and Thursday’s winning push to new highs (2618) and ending up 0.6%. Closing Friday down 0.3%, mainly on a weak German outlook and especially on lacklustre US.

Uhh… Apple… Getting peeled in Wednesday’s session. Performance over the last year has been that outrageous that we need to crawl back in time to find some chart points. $525-530 and then 506 (that was 3 weeks ago, thinking of it…). If we take the low of the latest (relative) weak patch in Nov 2011 at 364 as base and 21 Sep 2012 705 high, we end with a 50% retracement at 534, a level where we are around nowadays, then 494 and 444. 50g average at 605 catching up on 200d at 601. Suit yourself. Rebounced from 520 at Wed's open to 569 at Fri's open, just close over $30 lower back to... that very 533.

Pogo time in EUR/USD… Having shaken off its Risk Off banner role with the Fiscal Cliff discussion putting event risk back into the US camp, the EUR had rocketed 260 pips two weeks ago, ending at 1.296 (from 1.27), and added another 50 pips last week to 1.301. Chart-wise, things were pointing to mid-1.31, which was eventually nearly, but only nearly, reached on Wednesday at 1.313, before losing steam back to mid-1.30 and getting Bunga’ed on Thursday (-100), falling off the Magical Carpet Ride, and further depressed by the German eco outlook and rate cut discussions at the end of the week.

Commodities range-bound to softer: Oil -3% with WTI drifting to the low of a 86-89 range, Brent 111-107. Gold, unable to break over 1750 last week, fell from 1720 down to 1685, before rebounding past 1700 and settling there. Copper would rather have traded the upside, especially driven by China’s rebound in the middle-of the week, but weighted lower by its peers (+1%). CRB (-1%) representative and ranging below the 300-mark.

Outlook: Same on the menu: Broadly sideways, unless a shoe drops. If the sun shines, test the upside. Fiscal Cliff uncertainty remains on the menu. Italy becoming again a wobbly candidate for some Periphery stress. Need to see if the Greek buy-back will take Greece off the radar screens (for a while).

Lots of sentiment data with especially the flash PMI round on Friday to be scrutinized.

EGBs, and now all of them, very strong alongside very tight Risk. Seems a little odd and decorrelated. Compression movement still on-going with the Soft Core (and the Periphery, unless Bunga’ed) tightening in on Germany. Core short end taking clues from the rate cute / negative rates discussions with Schätze back near historic, negative lows.

Another down week for the BDIY, and back through the 1000-mark, at 966 from 1086 last week (-11%) and from the last 1104-peak 2 weeks ago.

Xmas shipping really, really, really over? Upcoming Chinese New Year (10 Feb 2013) an excuse? Still, one to watch for the real economy.

Intermediate 2012 high(post-Chinese New Year) was at 1165 early May after a 10-year low at 647 early Feb, before dipping to 872 in June, rising back to 1162, retesting lows at 661 mid-Sep, re-testing highs at 1109 before sliding back to 916 in the last down-leg

EUR 1,295 after 1,301 last Friday

Greek guesstimate: Ending the week with 2023s at 40.75 (14.15% yield) and 2042s at 31.0 (11.71% yield), which is a nice end of the year give-away to some astute buyers.